The Drucker Difference

Getting Toyota Out of Reverse

Shoichiro Toyoda, the honorary chairman of Toyota Motor (TM), once recounted a conversation between two Japanese educators—Atsuo Ueda, an expert in the management practices of Peter Drucker, and Masatomo Tanaka, who was responsible for teaching about the automaker's vaunted production system. "Toyota," Ueda observed, "operates exactly the way Drucker-san said a company ought to operate." Tanaka replied: "Yes, when we have trouble explaining what we're doing, we can usually find a good explanation in one of his books." Never, of course, has there been a more crucial time for Toyota to go back to the books. The company recently recalled 3.8 million cars and trucks, as regulators investigate hundreds of complaints that its vehicles are prone to accelerating without warning. At the same time, Toyota's finances have lurched into reverse: In May, the company reported a $4.3 billion deficit for the fiscal year—its first net loss since 1950. And with Toyota's luster fading, consumers appear to be turning their attention elsewhere. A few weeks ago, a San Diego consulting firm called Strategic Vision released its annual Total Value Index, based on feedback about prices, expected fuel economy, innovation, and other factors from 48,000 car buyers who'd purchased 2009 models. For the first time since the index was launched in 1995, Toyota did not have a single winner in any of the 23 categories, which range from small cars to heavy-duty pickups. Instead, Ford, Volkswagen, and Honda dominated the list. Turnaround in the WorksToyota's struggles aren't new. Two years ago this column took note of the company's mounting quality problems and suggested that executives would be wise to slow down in their headlong rush to become the world's largest carmaker. But what's called for now is not more piling on. Some seem to delight in knocking Toyota almost as much as they do in tearing down Tiger Woods. (One blogger has posted on the Web a song called My Toyota, sung to the tune of the old hit by The Knack, My Sharona: Are you gonna stop?/Speeding up/Such a scary ride, always speeding up.) Rather, what's instructive is to focus on how Toyota President Akio Toyoda, Shoichiro's son, and his team are trying to engineer a turnaround. Not surprisingly, one can see some Drucker-like thinking in their approach. Last October, Akio addressed the media in Tokyo. What captured most of the attention were his remarks that Toyota stood on the brink of "irrelevance or death" and was "grasping for salvation"—a public display of contrition extraordinary even by Japanese standards. Waning PassionBut what Drucker would have zeroed in on, I think, was Toyoda's less hyperbolic comment that consumers have been demonstrating a decided lack of enthusiasm toward the company's products, even in its home market. "They say that young people are moving away from cars," Toyoda said. "But surely it is us—the automakers—who have abandoned our passion for cars." To combat this, Toyoda—a self-described "car nut" who is qualified to race professionally—has been pushing his company to offer more autos that are "fun and exciting to drive." This might sound like pure fluff. But for Toyota, which has long made quality and reliability its only real hallmarks, it amounts to nothing less than a shift in what Drucker termed "the theory of the business." "Every business, in fact every organization, operates on such a theory—that is, on a set of assumptions regarding the outside (customers, markets, distributive channels, competition) and a set of assumptions regarding the inside (core competencies, technology, products, processes)," Drucker wrote. "These assumptions are usually taken for holy writ by the company and its executives. It is on them that they base their decisions, their actions, their behavior. The longer such a business theory works, the more it pervades the organization. A New Business Theory"But, as an old proverb has it: 'Whom the gods want to destroy they send 40 years of success,'" Drucker added. "For a business theory is not a law of nature. Eventually it becomes inappropriate to the realities of the market and technology. Then long-successful companies—especially big ones—begin to deteriorate. They lose their bearings. And the only thing that can effect the needed turnaround is rethinking and reformulating the company's business theory and repositioning the business on a new set of assumptions." This repositioning, Drucker advised, always starts with a few basic questions: Who are the company's customers and noncustomers, and what do they value? What are other players in the market doing and not doing? What assumptions are they making? In the case of Toyota, the Total Value Index provides some answers, and it suggests the company is on the right track with its emphasis on "fun and exciting." The auto market, according to Strategic Vision, is undergoing "a revolution in buyer perceptions," with more and more manufacturers having greatly improved the quality of their cars over the years—inspired in part by Toyota's traditional excellence in this area. And that means Toyota is going to have to differentiate itself in other ways. More Dazzle?First and foremost, Toyota must overcome its production-line troubles. If it doesn't restore its own reputation for consistently high quality, nothing else will matter. But beyond that, it has to give customers more: a bit of dazzle along with the durability and dependability. "Professor Drucker was long a believer … in always improving," Shoichiro Toyoda explained. "Asked which of his books was the best, he would reply, 'The next one.'" Similarly, he said, Toyota "is always better today than yesterday and better still tomorrow." I'm not so sure about today. But if the company can manage to adjust its theory of the business, it may well be right about tomorrow. Note: "The Drucker Difference" will return on Jan. 8, 2010. Happy holidays to all.